Are Family Firms More Tax Aggressive Than Non-Family Firms?

By Shuping Chen, Xia Chen, Qiang Cheng, Terry Shevlin. 2010

2,051 citations recorded by the source corpus.

Taxes represent a significant cost to the firm and shareholders, and it is generally expected that shareholders prefer tax aggressiveness. However, this argument ignores potential non-tax costs that can accompany tax aggressiveness, especially those arising from agency problems. Firms owned/run by founding family members are characterized by a unique agency conflict between dominant and small shareholders. Using multiple measures to capture tax aggressiveness and founding family presence, we find that family firms are less tax aggressive than their non-family counterparts, ceteris paribus. This result suggests that family owners are willing to forgo tax benefits to avoid the non-tax cost of a potential price discount, which can arise from minority shareholders' concern with family rent-seeking masked by tax avoidance activities [Desai and Dharmapala, 2006. Corporate tax avoidance and high-powered incentives. Journal of Financial Economics 79, 145-179]. Our result is also consistent with family owners being more concerned with the potential penalty and reputation damage from an IRS audit than non-family firms. We obtain similar inferences when using a small sample of tax shelter cases.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/2306e60eb1e549a2ce624c5c4eaa7d5a119bfb9a

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Citations in the corpus

Corporate Tax Avoidance and Stock Price Crash Risk: Firm-Level Analysis (2011, neutral): “Chen et al. (2010) find that family firms are less tax aggressive than their non-family counterparts.”
Public Pressure and Corporate Tax Behavior (2016, neutral): “18 that are potentially associated with firms’ tax planning activities, including Leverage, Intangibles, Inventory Intensity, R&D Intensity, Capital Intensity, and Capex (Chen et al. 2010; Hoopes et al. 2012; Hanlon et al. 2014).”
CEO After-Tax Compensation Incentives and Corporate Tax Avoidance (2014, neutral): “…of explicit taxes as proxies for tax avoidance and examine different mechanisms which are believed to significantly reduce explicit taxes (e.g., Chen et al. 2010, Dyreng et al. 2010, Armstrong et al. 2009, Dyreng et al. 2008, Robinson et al. 2010, Phillips 2003, Rego 2003, and Mills et al.…”
Incentives for Tax Planning and Avoidance: Evidence from the Field (2014, methodology): “For example, Armstrong et al. (2012) obtain R-squareds around 9.4%, Rego and Wilson (2012) obtain R-squareds around 14.9%, and Chen et al. (2010) obtain R-squareds around 12.5% in their regression of cash ETR after including year and industry fixed effects.”
The effect of corporate tax avoidance on the cost of equity (2013, methodology): “Consistent with this reasoning, Chen et al. (2010) find that tax avoidance in family firms is increasing in effective outside monitoring, presumably because effective outside monitoring mitigates managerial rent extraction and reduces the concern with family firms extracting rents through tax…”
Top Management Conservatism and Corporate Risk Strategies: Evidence from Managers' Personal Political Orientation and Corporate Tax Avoidance (2015, methodology): “We operationalized tax avoidance using two common measures: the firm’s financial accounting effective tax rate and the firm’s cash effective tax rate, similar to Chen et al. (2010) and Dyreng”
Outside Directors, Corporate Social Responsibility Performance, and Corporate Tax Aggressiveness: An Empirical Analysis (2016, methodology): “Our findings for the control variables are thus consistent with prior research (e.g., Chen et al., 2010; Frank et al., 2009; Note.”